82 – Why Continuity Planning – Shawn McBride

Today we’re talking with Shawn McBride about continuity planning for your company and why you should pay attention to this earlier rather than later in your business career. Whether you’re a solo business owner or are involved in a partnership planning for what happens when things implode before it happens can save your business and your economic life.

Shawn is going to help us understand what we need to pay attention to when it comes to keeping your business operating when the worst happens. Here are some of the things you’ll learn today:

What continuity planning is and why you need to pay attention to it.

Why the standard answers to what happens if an emergency happens are wrong.

Great continuity planning means that you have to get out of the way. Learn why this is true.

How shareholder agreements can save your business.

How to write an employee agreement that will hold up in court.

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Transcript:

Narrator: Welcome to TheSustainable Business Radio Show podcast where you’ll learn not only how to create a sustainable business but you’ll also learn the secrets of creating extraordinary value within your business and your life. In TheSustainable Business, we focus on what it’s going to take for you to take your successful business and make it economically and personally successful.

Your host, Josh Patrick, is going to help us through finding great thought leaders as well as providing insights he’s learned through his 40 years of owning, running, planning and thinking about what it takes to make a successful business sustainable.

Josh: Hey, how are you today?

This is Josh Patrick and you’re at The Sustainable Business.

Today, we have Shawn McBride with us. Shawn is an attorney. What he does is he helps people build businesses that stand the test of time which is a really worthy thing to do. And since we’re at the Sustainable Business, that kind of fits in with what we do here at the Sustainable Business where we ask you, “What would you be doing differently if your business was to last for 100 years?” Kind of similar questions, a little bit different but Shawn will talk to us about what his differences are.

He specializes in what we call continuity planning where, you know, how partnerships – what do you do if one of the business owners can’t work anymore and tons of other stuff. And we’re going to start off talking with him about that today. So, let’s bring Shawn in.

Hey, Shawn, how are you today?

Shawn: Hey, Josh, good to see you. I’m doing great. How about yourself?

Josh: I’m well. Thanks so much for joining me today.

So, let’s start off and talk about continuity planning. What do you mean by that?

Shawn: Well, you know, I go a step beyond what a lot of people think about continuity planning. Estate planners have kind of used that word some in their world. What I’m really talking about is making a business that’s going to continue regardless of what happens internally.

A lot of times, we have businesses that grow up. You have one, two, three owners. They’re there and if something happened to one of those owners, the business would go through a radical shift.

When I asked question to business owners, “What are you going to do if, you know, the guy who’s running the business dies?” Everybody says, “Oh well, his stock will pass to his wife and the wife will come in.” Meanwhile, most of the employees probably aren’t going to stick around to see what happens, right? They’re not going to make sure that next paycheck gets paid. They’re not going to see if the company really continues to grow. You lose a lot of your value. So, we talk about making plans and building the businesses stronger so that if something happens to one or two people, that business still exists and still continues. And for the owner, that wealth is still there for themselves or their families.

Josh: So what kind of things should business owners do to make sure their business lasts past them?

Shawn: The key is to get other people involved. So often, the key decisions are all locked into the owner or a handful of people, perhaps within the family. So, it’s about making something a little bit bigger so that other people are there.

And then, of course, with that comes risk, right? If you’re getting people that know what’s going on with your business, they know your financials, they know where your key customers are – you need to make sure that you have trust with them. But then, also oversight, to make sure that they don’t steal your customers or take the business away, should you die. So, we work on building some robust procedures in there and make sure that there’s checks and balances so that no one person has all the power to take over the entire business.

Josh: So what kind of checks and balances would you put in there? And how can you make sure those checks and balances are actually legal?

Shawn: Well, for instance, one of my clients got to a point where he wanted to sell his business. He built it later in life. He was in it for a while. Sales of the hockey stick was starting to take off. He said, “Great, let’s sell this business. I can go into retirement.”

And when he went to do that, he brought some business brokers in. The first thing the business broker said was, “This business depends on you. This business can’t exist without you.” So we had to go back to the drawing board and make a business that would last without him. And so, we did.

We sat down and he approached us. He said, “How do we do this?” And we put in a Board of Directors, so he got some other people in the community he trusts that are director-level people. And then he has operational people which are separate from the Board people that are really running the day-to-day. So, day to day goes on without him being involved. But then he has this higher level of oversight that comes in there and makes sure that those day-to-day people are actually doing their job. And should something happen to him, they’ll be there to make sure that those day-to-day people don’t steal the customers or take the business away or other bad things could happen.

Josh: You know, that makes sense. That makes sense.

So, do you ever get involved in putting together non-competition agreements, or employment agreements, or shareholder agreements where you say, “Look, you can work for me, but you can’t steal my customers.”

Shawn: Right. And that’s an important consideration for most businesses. And yes, most of our clients have some form of that.

Now, how far you can go with a non-compete – what you can and can’t do within a non-compete is going to vary from State to State, so we have to tailor to that. Sometimes, it depends on whether the person has equity ownership or not. A lot of States will recognize a non-compete if somebody’s an owner of the business but not if they’re just a mere employee. So, we look at the whole blending of factors.

But you’re right, you don’t want an employee to come in there, learn your business, learn your customer list and then set up shop across the street. So, we’re looking to build things that prevent that from happening. So non‑compete’s, shareholder agreements – sometimes, just to put into the partnership agreement or the LLC agreement that underlies the ownership arrangement, we just build all these mechanisms in there to foresee these types of things which happen quite frequently, unfortunately.

Josh: So a lot of times, business owners I talk with say, “Look, I want to put a covenant not to compete and I don’t want my ex-employee to be able to even work in the industry” which I think both of us and almost everybody listening is going to know that’s not going to fly. So, when you do put together a covenant not to compete, what should you put in there? What can you put in there? And what do you need to leave out?

Shawn: Yup.

Courts and estate legislatures have had this tension for some time. When you’re putting in a covenant not to compete, you’re restraining that employee from having future employment – earning a livelihood for themselves, for their families. There’s that tension on that side.

But, of course, as a business, you don’t want to give away your most valuable information to people if they’re going to take it and compete against you. So, the courts and the State legislature, sometimes there’s laws with it. Sometimes, it’s case law. They’re constantly fighting this balancing act of “Which one wins? Which one’s better?”

Obviously, a lot of people want to go very broad. We’ll have business owners going there and say, “You know, this employee can never work in this industry.” And that’s not going to fly. Could they not be in the neighborhood where you’re making your widgets at, could they not set up a widget factory within 2 miles? Well, most States and most courts would recognize that, right? If you’re making widgets nearby, directly competing, that’s understandable. That’s within the scope.

So, they look at time, scope and geography. Those are generally the tests. How long is this for? Not for forever, for a reasonable period of time – one, two, three or four years. Geography – are you saying you can’t make widgets anywhere? Or are you just saying you can’t make widgets across the street? And then the scope. You know, you can’t sell anything or you can’t sell blue-colored widgets on Saturdays? They’ll look at those types of factors and make a balancing test. And you look at other cases that have come through the court system to try to figure out where you think the courts in the particular State are going to land on that issue.

Josh: That’s a good answer to that. And for those who are listening, the narrower you can make these agreements; it seems to be the better chance you’re going to have it be held up, if it is challenging the court. Would you say that’s true, Shawn?

Shawn: That is absolutely the case. The more narrow, the more likely it’s going to be held up. So, the narrower you go on those three main tests that all the courts seem to rely on – the less time, the less geography and the less scope. The lower those go, the more likely it is to be enforced. So you really need to figure out what you need as a business and then tailor it to that.

Josh: Shawn, you just recently did a TEDx Talk – The Woman’s Advantage in Business Partnerships. What was your content in that? And what is the advantage of woman in partnerships?

Shawn: Sure. Yeah, let me back up for a second.

So, with have been looking to do TEDx Talk for some time. And I’d always admired the TED and TEDx format. And one of my staff came to me and said, “Well, why don’t you do this TEDx women’s conference?” which kind of surprised me. But she’s like, “You’re sensitive to women in business. You work with a lot of women in business. I think this’d be a great topic.”

So, we took kind of my core expertise of working with businesses, working with businesses partnerships and looked at it from a woman’s perspective, and did some additional research. I kind of had some hunches in my head but I didn’t want to go out on stage and stand there and say, “Well, these are my hunches as far as what women do in business.

We really went back and looked for academic and governmental research studies and we found that women compete well in three very distinctive areas versus men. So, these are things that women can really do that are good for partnerships. (1) Cooperation and collaboration. Women tend to work together as teams and there’s research studies that show that when you put women together, they’re much more likely to take compensation based on a group outcome versus the male counterparts. So, that’s good for partnerships.

(2) Communication women use a different communication style than men – tend to use more words, more descriptive. And this can also be very beneficial for partnerships. And then the third C that we hit upon at the TED talk is (3) compromise. Women are much more likely to reach a compromise solution. And I know, from my experience with my clients, those men-men partnerships when I have partnership agreements with men. They are much more likely to get in a disagreement over the future of the business versus the female counterparts. The females will tend to find a way work it out and get to some solution.

Josh: So, I want to just push back a little bit on the term “compromise” because I don’t like compromise. And here’s why, compromise tends to be lose-lose, meaning you’re not getting what you want and I’m not getting what I want. How does that fit in with having a good outcome from something?

Shawn: Well, there’s a tricky balance here, right? It’s a matter of degree. We all need to know what we want out of a business or a business arrangement, right?

So, we know certain things we need. We want to get to a certain outcome. We are negotiating. We’re going to put our time and effort into this business if we make this amount of money, or if we get these opportunities. At the same time, you don’t want to go so far that you ask for too much and take away to where somebody doesn’t want to collaborate with you or doesn’t want to do business with you.

So, it is a careful balance on compromise. You can’t have it all. You do have to trade something back to get something, you know? And that’s Economics 101 – basic economic specialization.

So, what we find is the female businesses on this research study show that when we put women together in a group and we put men together in a group, the women are much more likely to come to an outcome. And if you’re already a partner with somebody and you’re already in the business and you’ve got all that infrastructure – all that sunk cost, keeping it moving forward can be a real advantage to make sure the business keeps moving forward versus going into a situation where you’re fighting with each other and you’re sidelining the business and you’re not capturing new customer opportunities for growth.

Josh: So, you’re really talking more about cooperation than you are about compromise?

Shawn: Yes. I think the two are kind of interconnected, right? You need to cooperate. You need to work together for a greater good. You need to do things together.

But as part of that, you need to understand that if you’re in a group environment and you’re working as part of a team, as part of a partnership, you’re not always going to get exactly what you want. You know, the group may want to go to lunch to a different peace than you want to go to. That’s kind of a pedestrian every day example of it.

If you’re with five or six people, you may not get to go to lunch to a place that you want to go to every time. But, you know, every sixth time, you should. In a business situation, you’re going to hit these same things too.

If you’re working with a group of partners you’re not always going to get the exact way you want to do it. The team’s going to have to come up with something and you’re going to have to be part of that and see the greater good.

Josh: So, let’s move to a different topic for a second.

You have written here, you wanted to talk about the three laws of empowerment. So, okay, what are the three laws of empowerment?

Shawn: The three laws of empowerment are prepare for success, plan for success and then work on protecting yourself. Have protection for your success. So, this is really a fundamental framework that’s come together from my years of work with clients as we’ve worked on business plans, as we’ve worked on partnership agreements. I kind of had these notions in my head but I didn’t have succinct way of saying it.

Now, I can look at things in stages. Are you preparing/are you building for success? Are you executing a plan for success? And then finally, are you protecting yourself? Did you build that great partnership? Now, are you making sure you’re going to get paid and you’re going to get the things that are fair and right for your effort? So, it’s a three-stage process.

Josh: So, let’s take those one at a time. What should I do to prepare for success?

Shawn: Part of it is getting the vision, right? So, step 1 is kind of having that vision, knowing what’s possible. Where can you go in life? What can you build in your business? So, be prepared for success. Build a dream. Build a vision. That’s step 1.

And then, what do you need in order to fulfill that vision, to be the person you want to be? What do you have to bring together? Once you start looking in that direction of “These are the things that I need to do”, then you can underlie fundamental skill sets or assets you need to acquire and you can start building that preparation to get deeper into that plan that you’re going to build.

Josh: And what would be step 2?

Shawn: Step 2 is planning. And there’s a lot of different ways to go about your planning. But what I tell people to do is look at where you want to go. Figure out what steps you need to get there.

Figure out what needs to change. That‘s step 3 of the sub-planning module is, “What needs to change?” If you had the skills and you had the ability to do what you want to do, you’d already doing it. So, there’s something that has to change. Figure out what that change is.

Step 4 is, come up with a timeline. So now, you have a vision. You know what steps need to be done. You know there’s changes. What’s that timeline for that change?

And then step 5 is to re-visit that. Bring that all back together and adjust it. Once you work through all four steps – from experience, I can guaranty you that it’s not going to fit neatly together when you look at it from an overall perspective.

Now, tweak and adjust those timelines and those skill sets and that plan to make it work. And that really takes a lot of mystery out of planning because a lot of people get overwhelmed by the idea of planning. It seems so overwhelming. But if you break it down into component parts, it becomes a lot easier to move forward on it.

Josh: So, you’ve got two of the four pieces I like to see with a plan, which is one in “what” and “how”. But what about “why” and “who”?

Shawn: Well, why and who, I think, comes in—because there’s the three laws of empowerment, it’s a different framework. You know, I look at the “why” and the “who” would be part of the preparation, you know?

Preparation is why. Why am I doing this? Where am I going?

And the who is going to be part of that too. Who do you want to work with? How do you want to build it? So, I guess, my model breaks things apart into these three component parts, so it really makes planning into a longer range exercise.

Josh: Okay. Well, that makes sense. That makes sense.

So, how about protecting? How do we go about protecting?

Shawn: Protecting is really looking at where you’re at and making sure that everybody understand things. So, in the instance of a partnership agreement which, you know, something we deal a lot with in our world. How do you make sure you’re going to get paid if this partnership is successful? It’s great to be in that partnership but if it builds and does well and you don’t get paid out, you’ve wasted your time and your effort. So, we want to start early on the process, making sure there’s things in there to protect you.

I often use the example of the Social Network movie and the Facebook founders and there’s a famous scene in there where Eduardo Saverin’s very upset with Mark Zuckerberg because his stock got diluted. He got a smaller percentage of the company while Mark Zuckerberg’s ownership percentage stayed the same. And Mark Zuckerberg turned to him and said, “Well, you should’ve built provisions in there to protect yourself from this happening.”

And that’s the kind of situation we see unfortunately happen in the private business world too. I mean, that was a very public example. And Facebook ultimately became a public company.

But in the private world, we see places where people have been in a business three or five years and they get in an argument with their partner, and their partner says, “Well, I’m not paying you out. Sue me” and it gets very, very tense. But if you negotiate on the front end, put the right types of provisions in those agreements, we can avoid these situations before they even happen, when you make sure gets paid for the wealth they created.

Josh: So, that kind of sounds like you should have a shareholders’ agreement that has distribution policies as part of what you’re going to do?

Shawn: Absolutely, distribution policies.

And the other thing too with partnerships is no partnership lasts forever, right? Every partner’s going to want to come and go at different times. They’ve got different life situations.

Unless you get that third party buy-out, where everybody just gets cashed out at the same time, the business goes on for some period of time. Different partners are going to want to come and go at different times based on their life circumstances. We need to have an efficient way to recognize the amount of wealth created to date and to pay it out between the partners so that those leaving don’t feel like they didn’t get enough money and those staying don’t feel like they overpaid.

We need to have formulas and processes in place before we get to those stages. So, everybody understands what the game is before you start playing. Too many times, people start playing the game, they build the business and then one of them says, “I want to leave” and then they disagree on what the rules should’ve been for paying the one that’s leaving.

Josh: Yeah. I call that the pre-nup for business – the shareholders’ agreement because before you get started in the business–I’m not really quite sure why more people don’t do this but shouldn’t you plan for if things don’t work out or when things—you want to leave at a different time than I and kind of think through all these things?

Shawn: Yeah. Unfortunately, I think a lot of people go in with rose-color glasses and they’re saying, “Oh, we’re going to build this business. We’re going to make a bunch of money. We’re all going to get rich.” And regardless of whether the business does well or struggles, at some point you’re going to part ways. Business partnerships are rarely forever. People are going to go different directions based on family circumstances. Other businesses are going to come up.

Business partnerships are much more short term than even a marriage. You know, marriage is unfortunately a bad statistics to associate with them. Business partnerships have a much higher rate of discontinuation. So we need to start early in the process and understand that at some point we’re going to separate ways.

That business prenuptial you’re talking about – that’s great. You know, think about how to plan now for the fact that at some point we are going to go different directions. Now, we need to understand how we’re going to do it, what rules we’re going to play with. If you wait too long, nobody can agree about what the rules are. If you wait until the pile of cash sitting there and you say, “How to divide it” and nobody talked about how to divide it until the pile of cash was there, you’ve got a real problem.

Josh: So, it sounds to me, Shawn, like this is something that definitely do not want to go to LegalZoom and do. It’s something you actually want to sit down with an attorney who understands these issues so they can walk you through them one at a time and say, “Have you thought about this? And have you thought about this? And have you thought about this? Because I don’t think any automated system really takes you step by step through the whole process.

Shawn: These are highly custom, you know. I have never seen an online form or generic application that does it. You really need somebody experienced.

And when I see different lawyers’ work come to me later, right? Sometimes the clients contact us upfront and we build these things at our law firm. Sometimes, stuff comes to us later.

When I see other people’s work come to me, I see a great difference in the sophistication. Some lawyers will walk through a lot of what if’s and really build something robust. Others don’t. Others do something very simplistic, almost akin to LegalZoom.

LegalZoom is—you know, they’re forms. They are built on generic ideas and generic concepts. And nobody’s business partnership is that generic or that simple that a LegalZoom form is going to meet your needs.

So, the key is to get somebody who’s done these before, that knows the in’s and out’s, knows what type of issues might come up and will have a real conversation about the reality of your business, what’s unique about it. You know, what the possible exit/entry dates are et cetera. And then build a plan that works.

Josh: Well, that makes perfectly good sense to me. And, Shawn, unfortunately we are out of time. And I’m going to bet that some people listening are going to want to put together shareholder agreements and the legal things that can protect them from themselves and their partners. So, how would folks go about finding you if they want more information?

Shawn: Sure, www.mcbrideattorneys.com is my law firm. There are some free downloads there including a checklist of how to go through some of these issues. So, they may want to just go check that out. You can find our phone number there 214-418-0258. And then my business strategy firm is www.mcbrideforbusiness.com. Sometimes, if I’m not licensed in a State, people just want to bring me in more as a consultant to foresee some of these issues and we can do that as well.

Josh: Cool. Well, that’s a great place to know. So, I would encourage people who are listening to go check Shawn out. He’s a really smart guy and he also has a book called Business Blunders: How Planning is Key to Business Planning and Business Partnership. So, I would highly recommend that you pick up a copy and read it. And it might help you from making a very expensive mistake.

And, I also have something for you. I have a 1-hour free audio CD. It’s called Successes to Sustainability: The Five Things You Need to do to Build a Personally and Economically Sustainable Business. And to get it, it’s really easy. Just take out your smartphone – and don’t do this while you’re driving, but take out your smartphone and text SUSTAINABLE to 44222 – that’s the word SUSTAINABLE to 44222.

And this is Josh Patrick. You’ve been at the Sustainable Business. Thanks a lot for stopping by and I hope to see you back here really soon.

Narrator: You’ve been listening to TheSustainable Business podcast where we ask the question, “What would it take for your business to still be around 100 years from now?” If you like what you’ve heard and want more information, please contact Josh Patrick at 802‑846‑1264 ext 2, or visit us on our website at www.askjoshpatrick.com, or you can send Josh an e-mail at jpatrick@askjoshpatrick.com.

Thanks for listening. We hope to see you at The Sustainable Business in the near future.

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About Josh

Why would you want to listen to me?

My specialty is working with owners of private businesses. It’s where I have the most interest and can add the most value. If you own a business and are interested in a coaching relationship as well as mentoring, I’m your guy.
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ABOUT JOSH PATRICK

My main focus in life is helping private business owners create a sustainable business that will last past them. I help create great outcomes using life experiences I’ve had during my almost forty years of running and being around my favorite people, private business owners. I’m a student, an entrepreneur and a curious observer of life. Read More